Undertakings For Collective Investment Research Articles

The co-evolution of sustainable finance stakeholders under the EU taxonomy for sustainable activities: an exploratory study of Irish disclosure experiences

Purpose In pursuit of objectives, under the European Green Deal, to channel capital flows to sustainable activities, the EU Taxonomy offers clarity, labelling real economic activities as “sustainable”, based on technical screening criteria. This study of disclosure experiences aims to explore the role of co-evolutionary relationships in the Taxonomy’s effectiveness. Design/methodology/approach Co-evolution theory implies a dynamic interplay among sustainable finance stakeholders (SFSs), through adjustment to, impact on and operationalisation of the Taxonomy. Corporate disclosure experiences, including those of financial institutions and related SFS experiences, may reveal co-evolutionary processes. With significant Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs), Irish SFSs provide contextual insight. Semi-structured interviews with a purposive sample of Irish SFSs capture inaugural corporate Taxonomy disclosure experiences. Findings A thematic analysis reveals six co-evolutionary processes that facilitate Taxonomy implementation in pursuit of policy objectives: [1] cross-functional reporting; [2] iterative pre-empting and addressing compliance issues; [3] regulation as a catalyst for co-evolution; [4] advanced capacity building; [5] stakeholder adaptation and [6] graduated use of ESG data. Implications for sustainability policy development and management are significant. Practical implications Whilst limited to just one EU jurisdiction, given limited prior empirical evidence for sustainable finance regulations from co-evolutionary perspectives, this study highlights a catalytic, yet precautionary role for co-evolution in their transformation effectiveness. As such, they must take account of their potential to stimulate co-evolution and to nurture it in pursuit of their policy objectives. Social implications The findings of this study add to a small, but growing body of academic literature on the Taxonomy Regulation, which suggests that a co-evolutionary lens is important for gaining a comprehensive understanding of its early-stage dynamics. From an implementation perspective, the qualitative data reveals actionable implications for regulators and policymakers, such as building capacity, better anticipation of outcomes and investment in data infrastructure. Originality/value Unlike existing analyses of disclosures, this study offers a co-evolutionary lens on Taxonomy contributions to sustainable development through qualitative accounts.

From a ‘plain vanilla’ exercise to a highly complex compliance monitoring framework: Some practical challenges in investment compliance

The paper analyses the evolution of investment compliance over the past 15 years, since the Financial Crisis of 2008, and its transformation from a ‘plain vanilla’ task to a highly complex monitoring framework. The paper attempts to identify the roots for this transformation and comes to conclusions that are not intuitive. It further analyses the investment policies used in the sales prospectuses of the investment funds and elaborates patterns for those policies. The analysis suggests that it is appropriate to divide the patterns into two basic concepts: The ‘investment concept’ and the ‘exposure concept’. While the former seemed to fully dominate the market 15 years ago, the transformation to the new concept appears to progress at an accelerated pace. This is due to the increased complexity of the investment policies of funds and of the financial instruments that have been created by the financial market participants, as well as investment strategies employed by the portfolio managers, which cannot be properly encompassed by the old concept any longer. Participation in the creditor committees is an event that is obvious for the portfolio managers but may present fundamental legal concerns. Already, participation in such committees is doubtful for the funds that are prohibited from exercising a significant influence on their investment targets, such as undertakings for collective investment in transferable securities. An additional question that emerges when participating in such committees, and one which is analysed in this paper, is the question on the allocation of costs, the answer to which is rather art than science.

Trust Matters in the Single Market, but How? Analysing Trust Amongst European Financial Supervisors

AbstractEuropean regulatory co‐operation has become essential for the smooth operation of the single market, and this in turn requires trust. In the case of the European Union (EU) ‘Undertakings for Collective Investment in Transferable Securities’ (UCITS) Directive, for example, the member states' financial supervisory authorities rely on each other to provide a harmonised regime for the sale of investment funds across the EU. Funds authorised in one member state can be sold freely in another member state without further authorisation. The national authorities need to trust each other to ensure a consistent application of EU law. Yet we know very little about how trust matters from the perspective of member state regulators. In this article, we provide a better understanding of the relevant components of trust in the single market in financial services through an in‐depth case study of an EU network of national financial market supervisory authorities.

The Impact of the Draft “Unshell Directive” on Luxembourg-based Collective Investment Undertakings

The Impact of the Draft “Unshell Directive” on Luxembourg-based Collective Investment Undertakings

Key investor information disclosure regulation and retail mutual fund flows in the Finnish market

PurposeIn the European Union, the Undertakings for Collective Investment in Transferable Securities Directive (UCITS IV) requires fund management companies to provide a Key Investor Information Document (UCITS KIID) for investors. This papers uses archival data from the Finnish mutual fund market to test how the regulation's information disclosure requirements concerning past performance, risk and fund fees are associated with mutual fund flows.Design/methodology/approachThe study uses archival data on the mutual funds market in Finland to test how the regulation relating to retail investors' information requirements is associated with mutual fund flows.FindingsOur findings suggest that the UCITS KIID predicts retail investors' fund flows. While past performance is associated with fund flows throughout the observation period, retail investors appear to have become more sensitive to fund fees and invest in less risky funds following the adoption of the UCITS IV period.Practical implicationsInformation relating to fund fees and risk appears to be relevant to retail investors, which should be acknowledged in future iterations of short-form disclosure and in mutual fund marketing.Originality/valueThis paper is the first to assess the significance of KIID in actual market environment.

The European Regime for Investment through Undertakings for Collective Investment in Transferable Securities in Spain

The European Regime for Investment through Undertakings for Collective Investment in Transferable Securities in Spain

Sustainable Investments in the Insurance Sector

Achieving global environmental and climate agreements requires the efforts of not only supranational organisations and states, but also the financial sector, including the insurance sector. In addition to the core business of insurance companies, i.e. the undertaking of risk, their investments also play a key role. Recent years have seen an increasing number of unit-linked products that seek to contribute to some sustainability goal. However, the sustainability approaches and investor disclosures of collective investment undertakings and unit-linked asset funds have not been uniform, warranting regulation on account of the growing risk of greenwashing. New EU legislation has created the opportunity, inter alia, to distinguish collective investment undertakings and asset funds in terms of sustainability and to ensure greater transparency for investors. While there is no doubt about the need for regulation, at this stage it poses a number of challenges for institutions.

Creating factor clusters in the alternative Undertakings for Collective Investment in Transferable Securities (UCITS) universe

After years of expansion, the alternative Undertakings for Collective Investment in Transferable Securities (UCITS) market experienced wide fluctuations in performance during the Covid-19 market crisis. Using a novel quantitative process that utilizes Premialab Pure Factors, we identify seven clusters within a universe of 323 alternative UCITS based on their performance and factor characteristics. Investors can gain additional insights into their current or prospective alternative UCITS holdings by observing their performance in the context of the relevant cluster.

Italian Tax Authorities Provide First Clarification of the New Tax Exemption for Dividends Related to Direct Investment by EU/EEA Investment Funds

In this note, the authors discuss Answer 327/2021 of the Italian tax authorities, which addresses the new tax exemption for dividends on qualified shareholdings in relation to investments in companies resident in Italy for tax purposes. The Answer addresses foreign undertakings for collective investment established in an EU Member State or EEA country that exchanges adequate information with Italy, in particular, where the managers are subject to the EU Alternative Investment Fund Managers Directive (2011/61) rather than the EU UCITS Directive (2009/65).

A Comparatıve Overvıew Of Mutual Funds, Pension Funds, Real Estate Investment Funds And Venture Capital Investment Funds

The purpose of this study is to review emerging capital market institutions that are considered as ‘collective investment undertakings’ under Turkish Capital Market Law: Mutual funds, pension funds, real estate investment funds and venture capital investment funds. In this paper, data is retrieved from official website of Capital Market Board. With ‘VAR’ and ‘Johansen Co-Integration analysis’ and with ‘Vector-Error-Correction Model’, the impact of FX rates on net asset values of pension funds are examined for the period between 2015-2021 in Turkey. Findings indicate that in the long run, there is a co-integration relation between FX rates and net asset values. It is argued that net asset values of both pension funds and mutual funds have increased steadily in Turkey despite economic turbulances, an emerging economy. This study concludes that portion of funds as collective investment undertakings in financial industry will incline further with new products and legislation.

Foreign Investment Funds: Change in Tax Regime for Dividends and Capital Gains

The present article aims to analyse the impact of the 2021 legislative changes concerning the taxation regime for dividends and capital gains applicable to foreign undertakings for collective investment (UCIs) on structures frequently used by private equity funds that involve EU holding companies.

Developments in relation to risk management for European investment funds

This paper gives an overview of the recent developments in liquidity risk management for investment funds through the example of measures applicable to funds domiciled in Luxembourg. The paper first outlines the current context regarding risk management, with a focus on liquidity risk management. It then presents risk-management requirements to the undertakings for collective investment in transferable securities (UCITS) and alternative funds. Next, the paper discusses liquidity risk management with consideration of its legal definition and management practices and the need to address such risks at each stage of the life of the fund (design stage, postlaunch stage and stress testing through the funds’ activity). This study is based on the frame set by EU (European Union) law provisions, such as the UCITS Directive or The Alternative Investment Fund Managers Directive, and national Luxembourg legislation, including Luxembourg’s regulatory implementation of international standards such as The International Organization of Securities Commissions (IOSCO) Recommendations on liquidity risk management. This paper further outlines the important role of the Luxembourg regulator, the Commission de Surveillance du Secteur Financier (the CSSF), which has been proactively developing at a very early stage a strong administrative practice to ensure that liquidity risk-management processes meet the required standards in order to promote a sound and prudent fund financial situation. Therefore, the authors recommend strongly that the risk-management system of each relevant market player be checked for compatibility with the IOSCO recommendations and, where appropriate, with the CSSF Circular 19/733. They also stress the importance of adequate stress testing on risks related to liquidity to prepare for volatile times such as the current situation with the global pandemic coronavirus disease-2019 (COVID-19).

Luxembourg Fund Data Repository

In this paper, we introduce the Luxembourg Fund Data Repository, a novel database of investment funds available for academic research that was created at the Department of Finance of the University of Luxembourg. The database contains the population of Undertakings for Collective Investment in Transferable Securities funds domiciled in Luxembourg from the starting month of their existence (March 1988) to October 2016. The fund characteristics are organized in a comprehensive database architecture encompassing static and dynamic data over the entire life of the funds. The characteristics include fund identifiers, official name, status information, management company and other service providers, daily and monthly performance time-series, portfolio holdings, classification of investment objective, fees, dividends, and cash flows. The database was constructed after collecting and assembling complementary historical information from three data providers. Importantly, funds no longer in existence due to liquidation or mergers are included in the database, preventing survivorship bias. The database has been constructed to serve as a research dataset of high accuracy due to the maximization of population coverage, the maximization of historical coverage, and validation by using information acquired from the supervisory authority of the financial sector of Luxembourg. License currently available to researchers of the Department of Finance of the University of Luxembourg. Future plans for extending accessibility to the global academic community.

ESMA’s Mission to Integrate ESG Risks and Factors into UCITS and AIFMD: Value Added or Additional Administrative Burden

Environmental, social, and governance (ESG) factors are getting more and more important for the fund industry, not only for the management companies of the funds but also especially for the investors who become more sensitive to these kinds of aspects. This increasing importance has also been recognized by the European Commission, which officially mandated on July 24, 2018, the European Securities and Markets Authority to provide technical advice on how sustainability risks and factors should be integrated in European regulation. This article examines which approach the European Securities and Markets Authority suggests in order to integrate sustainability risks and factors in the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive and the Alternative Investment Fund Managers Directive and how this is seen by the market, as burden or value added, and therefore will be in the interest of UCITS management companies, self-managed UCITS investment companies, Alternative Investment Fund Managers, and their associations and for investors in these products. <b>TOPICS:</b>ESG investing, portfolio construction, portfolio theory <b>Key Findings</b> • ESG factors are getting more important for market players, and there are still a lot of challenges ahead. • ESMA’s initiative was well received from the market and helps to close the gap. • Market participants mainly don’t see this initiative as administrative burden but more a value added.

The ESG Disclosure Regulation – New Duties for Financial Market Participants &amp;amp; Financial Advisers

On 27 November 2019 Regulation (EU) 2019/2088 (ESG Disclosures Regulation) on sustainability-related disclosures in the financial services sector came into force and the regulation will apply 15 months later. The regulation forms part of a number of initiatives adopted by the European Commission as part of its Action Plan on sustainable financial adopted in March 2018. Apart from the ESG Disclosures Regulation, these include: • a regulation amending the benchmark regulation in relation to low carbon benchmarks and positive carbon impact benchmarks; • a regulation on the establishment of a framework to facilitate sustainable investment (the Taxonomy Regulation); and • delegated regulations amending MiFID II Delegated Regulation 2017/565 (LVL 2 MiFID II) and Commission Delegated Regulation (EU) 231/2013 (LVL 2 AIFMD) to integrate ESG considerations and preferences into investment advice and portfolio management; and to incorporate sustainability risks. The ESG Disclosures Regulation seeks to harmonize existing provisions on disclosures to investors in relation to sustainability-related disclosures by imposing requirements to a wide range of cross-sectoral financial market participants (e.g. UCITS management companies and investment firms) and financial advisers (e.g. MiFID II investment firms and credit institutions) in relation to financial products (e.g. alternative investment funds (AIF) and undertakings for collective investment undertakings (UCITS)). Due to the cross-sectoral approach of the ESG Disclosures Regulation, the regulation ensures a level playing field. Ultimately, the regulation seeks to contribute in eliminating green-washing, i.e. a form of marketing in which green values are deceptively used to persuade investors that the financial products of a financial market participant or financial adviser are environmentally friendly and therefore better. To that end, the ESG Disclosures Regulation requires the integration of sustainability risk in financial market participants' investment decision-making processes or financial adviser' advisory processes and transparency as regard financial products, which target sustainable investments. Specific requirements include pre-contractual disclosures, disclosures on websites and disclosures in periodic reports in relation to financial products. The Taxonomy Regulation supplements the disclosure rules enshrined in the ESG Disclosures Regulation. These will be subsequently discussed in this contribution on an integrated basis.

Risks of collective investment undertakings in the context of global capital markets

In the context of globalization, international institutional investors have taken over a significant proportion of global investment assets. Among this group also belong to collective investment undertakings whose primary motive is regulated by collecting funds from indeterminate group of natural persons and legal persons for the purpose of doing business on a global scale. As part of their reporting obligations, these entities are required to report on the risks associated with the investment and how to eliminate them. Investment firms must use risk management methods that allow these risks to be identified at any time. The main risks associated with investments in collective investment funds include global financial risks: interest rate risk, currency risk, equity risk, credit risk, counterparty risk, liquidity risk, operational risk and political risk. This article deals with the definition of specific investment risks and the options for their elimination for collective investment entities. The main goal of the article is to recommend the elimination of these risks based on the identified risks associated with collective investment.

The Impact of the New CSSF Circular on Luxembourg ManCos providing MiFID II Portfolio Management Services

On 23 August 2018, the CSSF issued its circular 18/698 on the substance requirements (the “CSSF Circular”) applying to Luxembourg management companies. The management companies to which the CSSF Circular applies, include alternative investment fund managers (“AIFM”), as well as management companies subject to chapters 15 (“UCITS ManCo”), 16 and 17 of the Law of 17 December 2010 (“UCITS Law”) relating to undertakings for collective investment. According to this new CSSF Circular, the CSSF is further tightening its substance and corporate governance requirements and placing greater demands on Luxembourg ManCo (as defined below) operators. Currently, both the AIFM and the UCITS Law allow AIFMs and UCITS ManCos (hereinafter collectively referred to as “ManCos”) to perform certain additional “MiFID II portfolio management services” in addition to the management and marketing of AIFs and UCITS (as applicable). For that purpose, the AIFM and the UCITS Law, till now, required AIFMs and UCITS Mancos to solely comply with certain MiFID I requirements as implemented in the amended Law of 5 April 1993 on the financial sector (“LFS Law”). The implementation of Directive 2014/65/EU (“MiFID II”), as implemented in the LFS Law in Luxembourg, strengthened investor protection rules. Contrary to the pre-MiFID II era, the AIFM nor the UCITS Law clarify whether and to what extent the new MiFID II rules apply to ManCos that perform additional MiFID II portfolio management services. By absence of any MiFID II updates of the AIFM and UCITS Law in this regard, the CSSF Circular clarified what MiFID II rules are applicable to ManCos additionally performing MiFID II portfolio management services. This contribution discusses the new CSSF Circular rules applicable to ManCos performing “MiFID II portfolio management services”, in addition to, those set out in the AIFM Law and the UCITS Law. For that purpose, first this contribution provides an overview of the MiFID II portfolio management services allowed to be performed and the requirements applicable to Man-Cos under the AIFM Law and UCITS Law.This article then clarifies what MiFID II and Luxembourg-specific requirements are under the CSSF Circular applicable to ManCos for the performance of these services. It continues by discussing the impact of the CSSF Circular clarifications regarding Luxembourg ManCos and then concludes.

Will the EU Commission Successfully Integrate Sustainability Risks and Factors in the Investor Protection Regime? A Research Agenda

Building a common EU framework for sustainable finance undoubtedly implies the integration of sound and sustainable processes and skills across the whole structure and governance of financial institutions. Consequently, a new financial paradigm is going to be needed, which will require the strengthening of investor care and protection, so contributing to the restoration of trust in the financial sector. In particular, on 18 December 2018, the European Securities and Markets Authority (ESMA) launched two public consultations on draft technical advice for the integration of sustainability risks and factors into the Directive on Markets in Financial Instruments (MiFID), the Alternative Investment Fund Managers Directive (AIFMD), and the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) regimes, with the aim to clarify the so-called fiduciary duties and to increase transparency in the financial services industry. However, the success of the EU initiatives on investor protection regulation may be seriously endangered by the existence of many challenges, weaknesses, and contradictions raised by economists and stakeholders in relation to the definition of sustainability, ESG data availability and reliability, the development of an EU taxonomy, conflicts of interest, product governance, and suitability assessment. This paper starts by briefly analyzing the recent developments of the regulation of sustainable finance at the global level, then offers a more detailed view on the establishment of a common regime on sustainable finance in the EU, with particular reference to the action plan ‘Financing Sustainable Growth’. Then, it examines the recent proposals for regulation on sustainable finance, specifically considering the barriers to the integration of sustainability risks and factors in the EU investor protection regulation—with particular reference to investment services—with respect to its four main dimensions: (1) disclosure of product information, (2) conduct of business (COB) rules, (3) product governance and intervention, and (4) financial education. The paper concludes that the EU reforming proposals, though admirable, risk oversimplifying a complex issue that cannot be easily solved without considering its practical implications on each category of financial operators in the performance of different financial services.

Cross-Border Mergers Between Investment Funds in Europe: A Complicated Enigma

The cross-border merger of investment funds (or collective investment undertakings – CIUs) is sometimes a complex operation which, so far, does not benefit from a sufficiently harmonized European approach. The complexity of these transactions stems from the fact that, in the mergers between CIUs, there is, first of all, a problem of compatibility between the general rules of civil, commercial, company law, etc., and the special regime of CIUs, which is clearly oriented towards the protection of the participant-investor. The general law reacts and combines with the special regime as collective investment schemes take different forms in the European context, which may include, for example, the most common forms of limited-liability corporations, partnerships, trusts, co-ownerships (with many derogations) or, quite simply, contracts (as is the case, specifically, of contractual investment funds). The regulation of CIUs modifies and influences the operation of the rules stemming from the general body of law, applicable as a function of the legal structure that the scheme has (contracts; corporations; trusts; etc.), since the merger directly affects the interests of the participant-investors. In the merger of CIUs, rules on collective management are mainly concerned with protecting the interests of the participants in the scheme, considered as holders and investors of a financial product. For example, where a merger involves statutory collective investment undertakings, what is taking place is not simply a merger between two companies, but a more complex phenomenon, where the system wants to ensure the protection, first of all, of an investor, and rules are adapted accordingly. In addition to the interplay between general and special rules, cross-border mergers of CIUs are affected – in the European context – by an incomplete regulatory framework, which is harmonized only insofar as the merger involves UCITS schemes.

A Markov Regime Switching Approach towards Assessing Resilience of Romanian Collective Investment Undertakings

This paper explores the sensitivity of Romanian collective investment undertakings’ returns to changes in equity, fixed income and foreign exchange market returns. We use a sample of 80 open-end investment funds and pension funds with daily returns between 2016 and 2018. Our methodology consists of measuring changes in the daily conditional volatility for the fund returns (EGARCH) and changes in their conditional correlation with selected market risk factors (DCC MV-GARCH) throughout different volatility regimes identified using a Markov Regime Switching model. We argue that, on average, the level of conditional correlations between funds and market risk factors remained stable and unconcerned by the volatility regimes. In addition, for only less than half of the funds in the sample, their volatility regimes were synchronized with those of the selected market risk factors. We found that, on average, fund returns are more correlated with equity returns and less correlated with changes in local bond yields, while not being significantly influenced by changes in foreign bond yields or changes in foreign exchange. During the period investigated equity returns were the most volatile while the funds returns volatility were, on average, much more reduced. Overall, our results show the resilience of the Romanian collective investment sector to the selected market risk factors, during the investigated period.